5/02/2012 @ 6:00PM

Andreesen, Horowitz: Capital's New Bad Boys

Christian Wiklund dropped an e-mail to Marc Andreessen this past February, asking to meet with the Internet legend-turned-venture capitalist and pick his brain. The pair had met briefly in 2009, as Wiklund was still in the early stages of launching Skout, a mobile app for flirting and chatting, and he wanted to know what Andreessen thought of his progress.

Less than 20 minutes later, Andreessen got back to him. They quickly reconnected in person, and by the following Monday, Wiklund was meeting the general partners at his new best friends firm, Andreessen Horowitz, who effectively were pitching themselves to him. By Apr. 3 ­Andreessen had invested $22 million in Skout. All my ­entrepreneur friends say, Wow, you got Andreessen Horowitz, says Wiklund. Theyre the top firm.

Its not just the entrepreneurs who say that. Cozily ensconced in offices on Sand Hill Road, Menlo Parks famed capital of venture capital, the firm has raised $2.7 billion since it was launched in 2009 and quickly grabbed a seat at the table in almost every new technology deal, with a portfolio of more than 90 companies that includes some of techs hottest names: Facebook, Twitter, Pinterest, Airbnb, Foursquare. Its exits include Groupon, Zynga, Instagram and, most notably, Skype, the deal that helped put it on the map after its $50 million bet in 2009 quadrupled when
Microsoft
bought the company for $8.5 billion two years later. For its earliest investors, Andreessen Horowitz has already returned nearly all of the $300 million it first raised (most funds last seven to ten years)–and the rest is all profit from here.

Those kinds of numbers reflect why Marc Andreessen sits at No. 2 on our Midas List–with his partner, Ben Horowitz, at No. 21. When the pair started pitching their idea for a new venture capital firm in 2009, they told potential investors it would take ten years to become one of the top five firms in Silicon Valley.

Theyve done it in less than three.

We are a partnership, but we operate like a company: quantitative, process-oriented, specialized experts in different areas, leverage through the professional staff, ­Andreessen says, explaining their fast track to success. This is actually a subtle but important thing.

The most amazing part of Andreessen Horowitzs rise is the background of the two founders. Neither of Silicon Valleys hottest venture capitalists had ever been a VC before, though each has dabbled as an angel investor. Andreessen is a technology wunderkind who at 23 co-created Netscape–as well as the first consumer Web browser,
Mosaic
–in the 1990s. Now 40, he has major street cred with entrepreneurs, including Mark Zuckerberg, who asked him to join Facebooks board. Horowitz, 45, an early Netscape product manager, went on to serve as CEO for
Opsware
, the company he cofounded with Andreessen.

Their detractors–and there are many–snicker that they dine out on Andreessens celebrity. That they overpay for deals. That its beginners luck.

Their fans–and there are many–agree with all of those sentiments, arguing that their rookie status, combined with access and an understanding of tech, has allowed them to change the rules in Silicon Valley. They have set the new standard for services to startups, says the pairs longtime friend Bill Campbell, the press-shy Silicon Valley mentor who has made a fortune whispering in the ear of everyone from
Apple
s Steve Jobs to
Google
s Eric Schmidt. Theyre not lobbing money over the transom and saying three Hail Marys. These are guys that are going to get their fingernails dirty helping their companies get better, and theyre doing it with a team of good people who all know exactly what role they need to play to make it work.

They have provided a kick in the pants to our industry to continue to innovate, adds Tim Draper, the third-generation VC who founded Draper Fisher Jurvetson, a firm that had its own run wearing the Silicon Valleys hottest crown.

Entrepreneurs coming to pitch Andreessen Horowitz–or a16z, the numeronym that encompasses the firms first and last letters with the character count in between–can glean a lot just by looking around. The lobby is filled with Andreessens books, from the HTML, XHTML, and CSS Bible to a Chaplin biography–and he claims to have read every one. The workspace itself looks middle-period Apple Store–pale wood floors, white walls, lots of glass and large-screen iMacs on every desk–except that the walls are crammed with modern art from Marc and Laura Andreessens collection, including Robert Rauschenberg paintings and a color woodcut of Roy Lichtensteins Reclining Nude, 1980, cheekily hung next to the womens bathroom on the second floor.

By Andreessens measure, 15 deals account for 96% of the returns for venture capital in any given year. If you dont see everything and win people over constantly, you dont have a prayer of getting into one of those 15. Some 1,500 companies came through this office last year, and the pitch process is unusual: Every entrepreneur gets a handwritten note a few days after the meeting that gives a detailed ­explanation about why the firm passed if the answer is no. Most other firms dont follow up. For the candidates that hold promise, Andreessen Horowitz will often turn right around and reverse pitch the entrepreneur, the way it did with Skout.

They pitched us how they look at venture capital from a different perspective, remembers Skouts Wiklund. Its not just about the money. It comes down to value added.

Ive been a customer of the top venture capital firms, so I know exactly what they do and dont do, says ­Andreessen. And what many dont do, he says, is offer a wealth of experience on starting a company from scratch.

That was a big selling point for Foursquare, the mobile social networking service that brought Andreessen Horowitz into its $20 million Series B funding in June 2010. We had our pick of the litter, says Dennis Crowley, Foursquare cofounder and CEO. Ben and Marc, theyve gone through this a number of times, and they see it as their duty to educate us.

Andreessens star power helps: Entrepreneurs line up to meet the tall bald guy who invented the browser. And Horowitz has become a Silicon Valley hero in his own right. His open and honest blog posts on the a16z site have been read by 10 million people and garnered him over 20,000 Twitter followers.

We wanted to tell our story. Venture capital has traditionally been behind the curtain, says Horowitz. How does Sequoia or Kleiner Perkins think about building a company? I dont know.

This pitch culture and suite of services come from a secret influence: Michael Ovitz, yet another longtime friend of Marc, who got to know Horowitz when he served on Opswares board. At his Creative Artists Agency during the 1980s and 1990s, Ovitz became the most powerful Hollywood agent ever, largely by moving the model from one of a single agent handling all aspects of a clients business to a full team of specialists.

Theyre very inquisitive guys, and they drilled in deep about what I did, what worked and what didnt, says Ovitz, who spends a few days a week now in Silicon Valley, working out of an office at Andreessen Horowitz, meeting with the firms portfolio companies. If they were going to go head-to-head with these long-established folks, they knew they needed to do something different. Otherwise, their money is the same as anyone elses.

Just as Hollywood did, Andreessen Horowitz embraced Ovitzs CAA model fully. Plenty of venture firms like ­Andreessen Horowitz have general partners that used to be CEOs, and plenty of venture firms offer their portfolio companies help with marketing, recruiting, business development and customer contacts. But the traditional VC model leaves it up to one general partner to be the point of contact and main provider of those activities to the startup; Andreessen Horowitz has blown up those walls.

Actually, theyve gone further: Theyve hired a dedicated staff to offer those services. Forty-five people at the firm work full-time to help its startups find talent, customers and marketing solutions. The operation is funded with the management fees that most other firms pay out to their general partners. The firms general partners get a modest salary–based on hints, its likely somewhere in the low to mid six figures–relying instead on distributions from successful exits to get them rich. Their fortunes are tied in a more direct way than usual to the success of their investees.

I thought [the business services] was hype at first, but it really works, says Joe Green, Mark Zuckerbergs Harvard roommate who hired his sales chief for his startup NationBuilder thanks to Andreessen Horowitz recruiters–before he had even signed his term sheet (the firm wound up leading his $6.25 million round in March). Adds Jason Goldberg, CEO and cofounder of Fab.com (see story, p. 42): They just know a lot and have a vast network.

That network includes 1,000 executives and 5,000 engineers, designers and product managers. Jeff Stump, a former executive recruiter, courts senior executives, while Shannon Rucobo Callahan, another Opsware alum, manages an eight-person team hunting technical talent and college interns. Between them theyve introduced more than 1,300 candidates to the portfolio companies, with 130 of those turning into hires.

With recruiting help comes a river of customer deals. Mark Cranneys job is to invite Global 2000 executives to stop by the firms offices and meet its startups, which get about 20 minutes each to make a pitch. There are multiple meetings every day. In 2011 the firm made 3,000 introductions between portfolio companies and potential customers, with the startups giving 600 presentations and honing their sales pitches under the eye of Cranney and the partners. In the first quarter of 2012 there were 88 briefings, 265 portfolio presentations and 1,625 introductions.

Not everyone is convinced Andreessen Horowitz has the model for long-term success. Mohr Davidow Ventures had a pilot program with a similar idea of building a staff to help portfolio companies, and Charles River Venture launched a program called CRVelocity in 2000 to provide business development services to startups. The results were mixed at both firms, according to George Zachary, a partner at Charles River Ventures who also worked at Mohr Davidow. My hats off to them for being ballsy and implementing it full force, more so than anyone ever has, Zachary says. I dont know how itll turn out.

One leading VC, when provided the cloak of anonymity, snickered louder. When you go to the doctors office, you want to see the doctor, not the physicians assistant. And the snickering moves well past that. Along clubby Sand Hill Road, where VC professionals have always gone about their business quietly, a16z, with its Charlie Rose sit-downs and press release barrages and blogging partners, seems downright garrulous.

Still more alarming to the old guard, Andreessen Horowitz is perceived to have driven up the price of some deals, particularly after it invested in Twitter last year in a private transaction that valued the microblogging service at about $3.7 billion, up from $1 billion in 2009. They used the [Skype] profits as funny money to go and buy into all the hot companies at as high a price as necessary, says another VC, who also asked not to be named. They got to look at everything. This way entrepreneurs wont do a deal until they take it to Andreessen Horowitz first.

Which is exactly the point. In the case of our company, the valuation got up there, says Brian Chesky, CEO and co-founder of Airbnb. Yet they were the most aggressive and most bullish. They werent waiting for the market. They had their own beliefs.

When anyone is this disruptive, youre going to have naysayers, shrugs Elizabeth Obershaw, a managing director at San Franciscos Horsley Bridge, which invests in ­Andreessen Horowitz as a limited partner. I dont think entrepreneurs go to them because they have a lot of money. I think people are going to them because they like the team, they like the services, they like the credibility.

Fabs Goldberg says the firm wasnt the highest bidder in its $40 million round raised in December. Where you see them paying up, its because they think its going to be a game-changing company, says Obershaw. Time will tell how often theyll be right, but theyre looking good so far.

Skype convinced Andreessen and Horowitz of its models efficacy. It was the pairs first big deal, and they took heat for investing $50 million–a huge chunk of their original grubstake–for 3% of a company that had lackluster financials and had already been jettisoned by
eBay
. Horo­witz acknowledges the deal was a risky move, but then he says, All big bets are when you look back at them. The reason the deal made sense was that it was reuniting the Skype brand with the intellectual property behind it, which was, oddly, still owned by Skypes original founders. The combined asset was suddenly a lot more valuable than it was under eBay. Understanding how they approached it made us more comfortable, says Obershaw. It was a concentrated risk, but they talked us through it.

Eighteen months later Microsoft offered $8.5 billion for Skype. Horowitz, a boxing fan whose office wall is lined with black-and-white photos of his favorites, including James Braddock and Muhammad Ali, used his blog to take a victory lap, calling out a few of those who had mocked the deal. The investment generated a tremendous amount of controversy for us, he wrote at the time. That controversy ended this morning.

Well, not really. The skeptics returned in April after Facebook bought the photo app Instagram for a stunning $1 billion. Its not that the firm missed the deal–Andreessen Horowitz had just turned its 2010 bet of $250,000 on Instagram into $78 million in cash and Facebook shares, a monstrous return, as Horowitz puts it. Rather, critics pointed out that, had the firm reupped in the latest funding round, its $78 million could have been twice as large.

Horowitz again took to his blog. Ordinarily, when someone criticizes me for only making 312 times my money, I let the logic of their statement speak for itself. The reason Horowitz passed on Instagram a second time was purely because the firm had already made another investment in a rival photo service, PicPlz, and didnt want to renege on a pledge not to finance any competitors. It was, he said, an important ethical issue. If we had to do it again, he wrote, we would.

It wont be the last time their rationale is questioned. But with a few more Skypes and Instagrams, people will finally start taking this pair at their word.